Managers must have a deep understanding and appreciation of the environment in which they and their organizations function. To illustrate the importance of environment to an organization consider the analogy of a swimmer crossing a wide stream. The swimmer must assess the current obstacles and distance before setting out. If these elements are not properly understood the swimmer might end up too far upstream or downstream. The organization is like a swimmer and the environment is like the stream. Just as the swimmer needs to understand conditions in the want the organization must understand the basic ingredients of its environment to properly maneuver (or change directions) among them.
The environment of business is the aggregate of conditions, events, and influence that surround and affect it (Davis). Since the organization is part of a broader social system it has to work within the framework provided by the society and its innumerable constituents. For the sake of simplicity the environment forces could be classified into two categories Internal Environment and External Environment. The internal environment consists of conditions and forces within an organization that effect its management. The Internal environment includes the organization’s mission, corporate culture, owners and the board of directors, employees, other units of the organization and unions . The external environment consists of those factors that affect the firm from outside its organizational boundaries. Of course, the boundary that separates the organizations from its external environment is not always clear and precise. For example, shareholders are part of the organization but in another sense, they are a part of its environment.
Features of environment:
Complex: The environment comprises of multifarious events, factors, conditions and influence arising from various sources . They interact with each other constantly and often produce an entirely new set of influences It is not easy to state clearly as to what kind of forces constitute a given environment.
Dynamic: The environment of an organization is dynamic and constantly changing. Changes in technology, government regulations, competitive forces etc., compel organizations to shift gears and change direction quite often. At times there could be too many changes it too little time, leading to shocks and surprise in the market place.
Challenging: All firms are impacted by political, legal, economic, technological and social systems and trends. Together these elements comprise the macro- environment of business firms. Because these forces are so dynamic their constant change presents myriad opportunities and threats or constraints to strategic managers.
External and Internal Environment
While analyzing the total (macro) environment it is more effective to deal, with the external forces first and then the internal although some opine that the reverse order is better. For example analysis of the internal environment might reveal cash surplus and the top management might then decide to search the external environment for an investment opportunity such as an acquisition. Even here, examining the external environment is essential to find whether the timing is right for an acquisition or any other use of cash. While deciding the internal external order of analysis one should not lose sight of aspects that work well in one set of conditions and change color in another set of circumstances. For example Arvind Mills was struggling earlier because it took huge loans for the installation of what has turned out to be excess capacity. Due to flourishing markets in the early 90s, the management overestimated future sales and increased plant capacity. When demand subsided, fashion changes occurred and new entrants came with a bang as a result Arvind Mills market share felt drastically . Also, denim (its main product) is not regularly used by an average person, as it is a fashion item. The company is now exploring overseas markets seriously in order to pay off its debts and survive. Thus, a large production capacity my be an internal strength in an expanding economy but it could be a tremendous burden and internal weakness in a recessionary period. Here, it could be better to first evaluate the external environment then the internal.
Excerpts from Hari Krishna and VSP